CFA L3
Value-Based Approaches Benjamin Graham is regarded as the father of value investing. Along with David Dodd, he wrote the book Security Analysis (1934), which laid the basic framework for value investing. Graham posited that buying earnings and assets relatively inexpensively afforded a “margin of safety” necessary for prudent investing. Consistent with that idea, value-based approaches aim to buy stocks that are trading at a significant discount to their estimated intrinsic value. Value investors typically focus on companies with attractive valuation metrics, reflected in low earnings (or asset) multiples. In their view, investors’ sometimes irrational behavior can make stocks trade below the intrinsic value based on company fundamentals. Such opportunities may arise due to a variety of behavioral biases and often reflect investors’ overreaction to negative news. Various styles of value-based investing are sometimes distinguished; for example, “relative value” investors purchase ...